A Return to Normalcy: MoneyTree Tracks Venture Funding Gains in 2010

Another report on venture investing is being released today, this time showing a decline in fourth-quarter deal activity compared with the same quarter in 2009—albeit a slight uptick from the previous quarter—and a significant overall gain for the entire year.

Venture funding during the fourth quarter of 2010 amounted to $5 billion in 765 deals nationwide, according to the MoneyTree Report from the National Venture Capital Association (NVCA) and PricewaterhouseCoopers, based on data from Thomson Reuters. That represents a 6.8 percent drop in dollars invested and an 11 percent decline in deal count compared with the same quarter of 2009, when $5.4 billion went into 864 deals.

However, the numbers mark a 2 percent increase in dollars and a 3 percent decrease in the number of deals in comparison with the third quarter of 2010, when VCs sank $4.9 billion in 789 deals. Venture investors said in a conference call with reporters that they’re sensing a return to normalcy amid a broader economic recovery and as the capital markets relax from the clampdown that began in 2007.

With the pace of venture buyouts and IPOs increasing, there are fewer later-stage startups now than in recent years, said John Taylor, the NVCA’s vice president of research. “It suggests that a lot of companies that arrived at a later stage, and needed late-stage funding, are starting to move on,” Taylor said during the conference call.

“The overall market for investing has clearly been strengthening,” said Seth Levine, a managing partner at the Foundry Group in Boulder, CO. He said the 2010 data reflects “an increase in activity, and an increase in energy,” and added that he expects to see single-digit growth rates in venture investments in 2011. Levine also singled out advertising technologies, mobile, and personal instrumentation (for monitoring calorie intake, steps taken, and other personal data) as hot areas for tech-related venture investments.

For the year, venture capitalists invested $21.8 billion in 3,277 deals, according to the MoneyTree Report. That’s a 19 percent jump in dollars invested and a 12 percent increase in deals over 2009, when the MoneyTree survey counted $18.3 billion in 2,927 deals.

“2010 for us was what I would call an average year,” said Gerry Langeler of Seattle-area-based OVP Venture Partners. Langeler, who called the current investment environment “fairly normal,” added that OVP’s partners are seeing interesting projects “where worlds collide,” for example, at the boundaries of IT and the life sciences. Langeler also noted a clustering effect around some of the better-performing companies, such as Groupon, that is attracting additional investors and prospective buyers to similar companies.

As for the industry’s outlook, Langeler said he expected venture investing would continue on its current pace through 2011. But as existing venture funds get invested and firms seek to raise new funds, Langeler said, “I would look to 2012 to really answering the question as to what the new normal is.”

As usual, the MoneyTree survey results don’t align with the data we reported last week from CB Insights, which found that $950 million invested in four Internet deals in December boosted VC funding in the fourth quarter to $6.5 billion, an 18 percent increase over the same quarter in 2009. CB Insights also showed a 14 percent gain in funding and a 13 percent increase in deals in 2010 over 2009. The numbers vary because the surveying firms rely on different sources and different ways of counting and categorizing venture deals.

Within the MoneyTree Report, though, a number of interesting trends are apparent in the national data. Some highlights:

—Software deals are back. Venture investments in software amounted to $1.1 billion in 218 deals during the fourth quarter, which was the highest quarterly dollar level since the third quarter of 2007. Software was the only industry sector to get more than $1 billion in the quarter. Software also represented the single largest investment sector for the entire year, garnering $4.0 billion in 835 deals.

—Venture funding for Internet-specific deals surged in the last quarter, with $1.2 billion invested in 190 deals distinct from the software and IT sectors. That was a 30 percent increase in capital invested over the $942 million that went into 194 Internet-specific deals in the same quarter last year—and a 65 percent increase in capital and a 19 percent increase in deals compared to the $745 million that flowed into 160 deals during the third quarter. The $3.7 billion that went into 729 deals in 2010 was a 28 percent increase in dollars and a 14 percent increase in deals over 2009, when $2.9 billion was invested in 638 deals.

—Cleantech showed a 68 percent increase in fourth-quarter capital invested year-over-year, and a 76 percent annual gain for 2010 compared with 2009. The MoneyTree survey found that $765 million was invested in 57 deals during the quarter, compared to $441.1 million that was invested in 54 deals during the fourth quarter of 2009. For the full year, almost $3.7 billion went into 267 deals compared with $2.1 billion for 195 companies in 2009.

—Venture funding in biotechnology fell during the fourth quarter. The MoneyTree survey found that nearly $685 million was invested in 94 deals nationwide, a 38 percent drop in capital and a 19 percent decline in deals compared to the $1.1 billion that was invested in 116 deals during the fourth quarter of 2009. For the year, venture firms put nearly $3.7 billion into 460 biotech deals, which was an increase compared to the almost $3.6 billion that went into 426 deals in 2009.

—Funding for medical device startups fell during the quarter by 48 percent compared with the previous year, with almost $400 million invested in 71 deals. In the same quarter of 2009, nearly $775 million was invested in 93 deals. Venture funding for medical devices showed a nearly 9 percent decline for the full year, with 324 companies getting more than $2.3 billion. In 2009, 323 medical device companies got more than $2.5 billion.